There are two main reasons for considering investing outside of Canada: diversification and growth.
Diversification helps protect you from losing all your assets when there are changes in the markets whether invested at home or globally. You’ve probably heard the expression, “Don’t put all your eggs in one basket”. The key to diversification is that you are spreading the risk of changes in the market over various investments so that if one sector declines, another sector may increase. A good example is the oil sector. Within in the past year, oil stocks have declined from 30% to 60%. If you had 10% of your portfolio invested in that industry, then your losses would only be a small percentage of your portfolio. However, if your portfolio had a larger share, then the decline would be more significant.
It is important to understand the various markets around the world. There are Canadian, US, International (all countries other than North America) and global markets (worldwide including North America). The global markets are also divided into emerging and developed markets.
If your portfolio is focused on growth, you could consider the emerging markets, which often experience rapid growth. Investing in these markets may provide growth opportunities not available in other more established markets. That said, there are higher risks associated with emerging markets, such as political instability, availability of information, ability to access funds, and the time required to cash in your investments.
When investing globally, it is important to consider fluctuations in currency. The Canadian dollar is currently declining compared to the US dollar. In the past year, we have seen the Canadian dollar move from par to the low 80 cent range. If you held an investment in the US worth $1,000, a year ago it would have been worth $1,000 in Canada when the dollar was at par. Today, that US investment is worth approximately $1,180. When our dollar is weak against the foreign currencies we invest in, our return on investment is impacted by the increase in the value of the currency as well as on the investment. If you choose to invest in currencies outside Canada, you may want to consider looking into currency hedging to reduce the risks of change in the Canadian dollar.
There are also tax implications to investing outside of Canada. Dividend income is one example as only dividends received from Canadian companies are eligible for the dividend tax credit. In addition, there could be foreign income taxes withheld on distribution to non-residents. Depending on the tax treaty Canada has with that country, you may or may not receive any credit for those foreign-paid taxes.
There are no set guidelines to the amount of diversification you should have in your portfolio. Professionals evaluate what is happening in the global economy and often adjust annually to reflect those changes and their investment strategy; which means that strategies are widely diverse.
The best strategy for your portfolio is a well-balance mix that allows you to tolerate risk while getting solid returns. In other words, you don’t want to chase trends in the market trying to diversify your portfolio. Working with a good advisor will help you to make sound financial decisions that match your investment strategy. Top of page